PROFESSIONAL INTIMACY Leave Impersonal Leadership Behind November/December Banker OVER A CENTURY: BUILDING BETTER BANKS — Helping Coloradans Realize Dreams
contents ©2023 The Colorado Bankers Association is proud to present Colorado Banker as a benefit of membership in the association. No member dues were used in the publishing of this news magazine. All publishing costs were borne by advertising sales. Purchase of any products or services from paid advertisements within this magazine are the sole responsibility of the consumer. The statements and opinions expressed herein are those of the individual authors and do not necessarily represent the views of Colorado Banker or its publisher, The newsLINK Group, LLC. Any legal advice should be regarded as general information. It is strongly recommended that one contact an attorney for counsel regarding specific circumstances. Likewise, the appearance of advertisers does not constitute an endorsement of the products or services featured by The newsLINK Group, LLC. Jenifer Waller President & CEO Alison Morgan Director of State Government Relations Brandon Knudtson CFO & Director of Membership Lindsay Muniz Director of Education Patricia Wells Director of Communications Megan Carruth Executive Assistant Margie Mellenbruch Bookkeeper* Melanie Layton Lobbyist* Garin Vorthmann Lobbyist* Andrew Wood Lobbyist* Caroline Woodhouse Lobbyist* *Outsourced 140 East 19th Avenue, Suite 400 Denver, Colorado 80203 Office: 303.825.1575 Websites: coloradobankers.org smallbizlending.org financialinfo.org colorado-banker.thenewslinkgroup.org BUILDING BETTER BANKS — Helping Coloradans Realize Dreams 24 6 4 Message from the CEO CBA Stands Ready By Jenifer Waller, CEO, Colorado Bankers Association 6 Making the Most of What You Have By Eric Hallman, Vice President — Bank Card Sales & Support, Bankers’ Bank of the West 8 AI Still Needs Humans: How To Harness the Power of Both With the Rapid Growth of Cyberattacks, People and Tech Must Work Together To Protect Modern Networks By Loraine Laguerta, Technical Writer, SEI Sphere 10 Professional Intimacy Leave Impersonal Leadership Behind By Karen Brown, CEO, Exponential Results 14 CBA Centerpoint Going Beyond the Desk To Hear the Stories of Colorado Bankers 16 Washington Update Advocating for ACRE: How Congress Can Help Rural America By Rob Nichols, President and CEO, American Bankers Association 18 Investment Subsidiaries Offer Solution for Municipal Securities By Larry Wood, Executive Vice President — Financial Institutions Group, The KeyState Companies 20 Digital Signage is a Must in Banking and Here’s Why By Jennifer Moore, DaVinci Sign Systems, Inc. 22 FedNow Assures Wholesale Adoption of Instant Payments By Dean Nolan, Managing Director of Commercial Payments, Strategic Resource Management (SRM) 23 Securing Your Data Advice From an Award- Winning Cybersecurity Team By Keith Gruebele, BHG Financial 24 Elevate Customer Engagement and Loyalty Through Personalization in Financial Advertising By Adam Lee, President, Techint Labs 26 Upcoming CBA Events 3 Colorado Banker
B CBA Stands Ready By Jenifer Waller, CEO, Colorado Bankers Association Bank regulators are now on notice that the industry will not sit idly by if they act outside of their congressional authority or try to sidestep the rulemaking process. Numerous lawsuits, where federal bank regulators will attempt to defend their actions, are currently moving forward. Litigation brought by the American Bankers Association and the Texas Bankers Association questioning the constitutionality of the Consumer Financial Protection Bureau’s funding mechanism (they do not go before Congress for an appropriation) was heard by the Supreme Court in early October with a decision expected in spring of 2024. The lower court ruled that the funding mechanism was unconstitutional. Litigation was also brought against CFPB by the American Bankers Association, the Texas Bankers Association and the U.S. Chamber of Commerce, challenging the legality of recent changes made by the agency to the Unfair, Deceptive or Abusive Acts or Practices (UDAAP) examination manual. The U.S. District Court ruling in September makes clear the CFPB exceeded its statutory authority when it updated its exam manual and announced an open-ended and novel power to examine banks for alleged discriminatory conduct. This authority is nowhere to be found in the agency’s mandate from Congress, as the court concluded. The judge agreed that the CFPB clearly exceeded its statutory authority under the Dodd-Frank Act. In addition, the judge upheld ABA’s challenge to the exam manual on the grounds that it was the product of an unconstitutionally funded agency. The Court judgment included a vacatur of the agency action. We do not yet know when this case will move to a higher court. Another lawsuit brought forward by the Texas Bankers Association and the American Bankers Association questions if CFPB went beyond the Congressional approved scope regarding section 1071 of the DoddFrank Act. DFA granted CFPB the collection of 13 data points. CFPB by rule would be collecting 81 data points. A federal judge in Texas granted a limited injunction staying implementation of the Consumer Financial Protection Bureau’s Section 1071 small business reporting rule for members of the American Bankers Association and Texas Bankers Association until the U.S. Supreme Court rules on a separate challenge to the CFPB’s funding structure. The Kentucky Bankers Association brought a similar lawsuit with yet another victory for the industry. The Judgment reads, “The Consumer Financial Protection Bureau is ENJOINED from enforcing the Small Business Lending Rule until the Supreme Court issues an opinion ruling that the funding structure of the CFPB is constitutional.” It appears that the Court has granted a broader injunction against the CFPB on the enforcement of 1071 pending a ruling by the Supreme Court on the constitutionality of the funding structure of the CFPB. CBA stands ready to help further these actions by joining the litigation, issuing amicus briefs or helping fund legal expenses. I am optimistic about the higher court’s probability of ruling in favor of the banking industry. However, even if the rulings are not in our favor, bank regulators now know if they cross the line, the industry will hold them accountable. I am optimistic about the higher court’s probability of ruling in favor of the banking industry. MESSAGE FROM THE CEO Colorado Banker 4
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H Making the Most of What You Have By Eric Hallman, Vice President — Bank Card Sales & Support, Bankers’ Bank of the West Historically, businesses of all types have been driven to grow by attracting new business from “net new” prospects. While this growth strategy is, and always will be, mission number one on everyone’s list, there is a wealth of potential within a business’s existing customer base. It has been proven in numerous studies that it is far less expensive for a business to keep and expand its existing customer base than to bring on net new customers. Take the case of the bank’s ATM/debit program, a product that has evolved into perhaps the most publicly facing product a bank offers. In 2020, the average U.S. consumer made 68 purchases and payments each month — and more than a third of those transactions were made with a debit card. Cardholders present their cards for payment, either physically or virtually, on average almost 25 times per month. Most community banks see a card-to-DDA penetration rate of 75% with an activation delta of between 15% and 25%. Many in the industry would suggest that a penetration percentage north of 90% with an activation percentage delta of 10% to 15% is realistically attainable. The banking industry has been working with debit cards, primarily Visa and Mastercard, since the mid-1980s and within the community banking industry since the early 1990s. Community banks, in large measure, initiated programs during the 90s with the goal of breaking even. Reluctance to the product was the perception of risk, while the adoption of a program was driven by customer desire and marketplace competition. Interestingly, however, a debit card program epitomizes a bank’s business model — namely, income generation through risk management. An issue of concern associated with a debit card program that many community banks voice is the perceived lack of control. A bank’s ability to manage risk rests on its ability to directly control the risk the bank is accepting. Debit cards put that control in a third party’s hands, which for many community bankers, is an unsettling prospect to accept. It’s no secret that the debit card program is a “house of cards” that is directed and controlled by the two leading card companies: Visa and Mastercard. The rules of engagement are determined by those two companies, and those rules are often perceived as overwhelmingly designed to benefit the merchant world. In short, if there are no merchants accepting cards as a form of payment, the entire product falls flat. Another issue that plagues a debit card program is the notion that the program has an “out of sight, out of mind” element. In other words, transaction authorization and transaction settlement occur automatically. The process happens almost always without worry. In the end, less than 20% of all debit card transactions are fraudulent. Taking into account some 87 billion purchase transactions U.S. consumers perform with debit cards each year, the “worry-free” percentage is quite high, which exacerbates the auto-pilot perception of the programs. Fraud is a genuine concern that constitutes the seedy underbelly of the debit card industry. As mentioned earlier, Visa and Mastercard have written dispute and chargeback rules that clearly benefit the merchants by design. Banks are required to jump through a number of hoops and endure seemingly endless timeframes to find a resolution to a disputed transaction that often works to the bank’s disadvantage. Never forget that the debit card product is based on the idea that a merchant pays a fee to the card-issuing bank in exchange for a guarantee that the transaction amount will be paid. The transaction’s authorization and corresponding settlement justify that merchant fee and provide income to the issuing bank in exchange for that payment guarantee. Visa and Mastercard market a debit card program through which the income a card-issuing bank generates is an offset to the risk the bank accepts. This premise assumes that the expense the bank takes on when issuing debit cards is a cost of doing business. Add now the primary sellers of debit card programs — regional switch networks and processors — that ostensibly sell the debit card program under the guise of the income covering the program expense. The result is a single source of income from the merchant interchange and two expense buckets: a fraud bucket and a program expense bucket. Is there enough coming from the bank’s income spigot to fill each of the expense buckets? The short answer for the overwhelming number of community banks is yes. In some cases, this is difficult to plainly see depending on the method a bank’s processor uses to summarize the monthly income and expense. The norm now is that a bank’s transaction interchange income is credited daily, which is a good thing. However, the bank’s processor invoices the bank on a monthly basis. This creates a visual disparity between seeing the monthly expense as a lump sum and not necessarily seeing the income as a monthly lump sum. Consequently, many banks lose sight of both the positive monthly net revenue a debit card program provides and the increased potential revenue the program could generate by sharpening the program’s management internally. Colorado Banker 6
How, then, does a bank work within the confines of a third-party rule maker to increase its element of control to maximize the potential a debit card program brings to the bank’s bottom line? Here are some important questions every bank should ask to determine their commitment to a profitable and efficient debit card program: How does your bank work through the debit card application process? • Is a card application automatic? • Are employees encouraged/incented to sell the debit card program? • What is your bank’s underwriting process for debit cards? Is there an internal process in place to follow up on nonactivated card accounts? • How frequently are issuance reports reviewed? • What is the internal procedure for follow-up calls to non-activated card accounts? How does your bank oversee the program’s risk assessment? • What are your bank’s policies and procedures for tracking fraud trends? • How quickly does your bank act on trends discovered locally or nationally? Does your bank budget for debit card loss? • You might be surprised to know that many banks fail to budget for debit card losses. Establish a method of accounting for quarterly and annual risk no differently than you do for loan losses. How frequently, if at all, do you assess your program’s outstanding card portfolio? • Do you measure card count versus active cards and statused cards? What types of marketing programs has your bank implemented to increase your program’s activity and profitability? • How does your bank encourage your cardholder accounts to be “top of wallet”? • Is your bank’s card the first card your customers use? • Do you issue business debit cards or Health Savings Accounts? • Business debit cards generate interchange revenue for the card-issuing bank at a greater rate than a consumer card. How many consumer cards are you issuing to DBA accounts, sole proprietor accounts or agricultural accounts that could be converted into a business debit card generating higher income? Does your bank issue contactless cards? • COVID has heightened customers’ awareness of contactless capabilities and shown the speed and ease of a contactless transaction. What is your bank’s appetite for tokenization and mobile wallets (Apple Pay, Samsung Pay, Google Pay)? • Customer and marketplace demand will tend to dictate your appetite, but the marketplace is moving in this direction. Heightened emphasis on better internal procedures, increased portfolio review, employee incentives, accounting for debit card fraud and loss and a marketing plan that aligns with your bank’s strategic plan will position you to make the most of the debit card program you have. The benefits go far beyond the debit card program and dovetail into the bank’s overall service mission. A debit card program may seem to be auto-pilot, but mindfulness, internal processes and effective marketing can pay huge dividends and increase income and, ultimately, customer loyalty in the process. Eric Hallman is Vice President — Bank Card Sales & Support at Bankers’ Bank of the West. He can be reached at ehallman@bbwest.com. 7 Colorado Banker
MMonitoring logs and analyzing data is mind-numbing and time-consuming work; it’s a fast path to burnout. AI has taken over this work, offering organizations a fast and efficient way to monitor their systems for potential threats. According to a Security Intelligence article,1 AI has improved cybersecurity operations in the following ways: • Earlier recognition of threats via pattern identification and anomaly detection • More informed ability to analyze data and identify potential attack vectors • Improved threat intelligence due to the ability to mine data sources • Elimination of repetitive tasks via automation and orchestration AI Still Lacks Full Capabilities Companies benefitting from incorporating AI in their cybersecurity programs still require human intervention for the same reasons Tesla’s “Full Self-Driving” capability still requires a fully attentive driver: the deep learning capabilities of AI, where an algorithm completely mimics the structure and function of the brain, are just not there yet. AI Still Needs Humans: How To Harness the Power of Both WITH THE RAPID GROWTH OF CYBERATTACKS, PEOPLE AND TECH MUST WORK TOGETHER TO PROTECT MODERN NETWORKS By Loraine Laguerta, Technical Writer, SEI Sphere Colorado Banker 8
From an accuracy perspective, we often forget that AI is as inherently biased as the humans who created it. From an accuracy perspective, we often forget that AI is as inherently biased as the humans who created it. When fed distorted datasets — especially when the dataset is small — the precision of AI suffers greatly. Even more alarming is when faulty conclusions are drawn within industries where lives and livelihoods are at stake. One algorithmic error has the potential to produce the false negative that gets your organization breached. Assets and users can be tagged as businesscritical or high-risk to aid with risk scoring, but there is little nuance beyond this weighting. A Model for AI and Human Coexistence Thankfully, effective models for AI/human coexistence are available. Human-in-the-loop (HITL) reinforcement learning works like call centers — AI is confined to assist with only a handful of predetermined actions, beyond which the situation escalates to an analyst.2 AI does the heavy lifting when it comes to monitoring, alerting human analysts when a possible threat is detected. They can then address and resolve issues more efficiently. The benefits speak for themselves. MIT researchers discovered that when HITL was included in a security system, detection rates more than tripled and false positives were reduced fivefold when compared to an unsupervised security system.3 Cybersecurity Foundations for AI With a Human Touch Follow these recommendations when incorporating AI into your cybersecurity program: 1. Build a strong foundation. “If you’re not already doing something, you can’t automate it,” says John Pescatore, Director of Merging Security Trends at SANS. Ensure the basics of your cybersecurity program are strong before entertaining the idea of AI. 2. Select use cases wisely. Pick the low-hanging fruit by opting for large, quality data sets with readily available subject matter experts who can train the algorithm well. Capgemini Research Institute recommends the following to start: malware detection, intrusion detection, risk scoring, fraud detection and user/ machine behavior analytics.4 3. Deploy SOAR workflows. Security, orchestration, automation and response (SOAR) tools allow analysts to implement automatic workflows with manual decision points where appropriate. 4. Educate cyber analysts on AI technology. It’s essential for your staff to understand basic machine learning concepts and how your specific AI tool functions before going live with any AI tool. With the buzz that surrounds new AI technologies like ChatGPT, it’s easy to get carried away with all the good AI could do for cybersecurity. But, like all things in this industry, the smartest course is often the most boring: balanced investments between the sacred triad of people, process and technology are still critical. Sources 1 Gerald Parham, “4 Ways AI Capabilities Transform Security,” Security Intelligence, August 25, 2022. https://securityintelligence.com/posts/aicapabilities-transform-security/ 2 Alessandro Civati, “Human-in-the-loop Model – Why AI Needs Human Intervention,” July 5, 2022. 3 K. Veeramachaneni, I. Arnaldo, V. Korrapati, et al. “AI2: Training a Big Data Machine to Defend,” 2016 IEEE 2nd International Conference on Big Data Security on Cloud (BigDataSecurity). https://people.csail.mit.edu/kalyan/AI2_Paper.pdf 4 Reinventing Cybersecurity with Artificial Intelligence: The new frontier in digital security,” Capgemini Research Institute, 2019. https://www.capgemini.com/wp-content/ uploads/2019/07/AI-in- Cybersecurity_Report_20190711_V06.pdf Loraine Laguerta is a Technical Writer at SEI Sphere. 9 Colorado Banker
UUntil recently, one of the basic tenets of leadership was to keep your distance from team members, their direct reports and even other leaders. The idea was to never get too close, or it would reduce your effectiveness as a leader. This philosophy has been reinforced through innumerable catchphrases and nuggets of well-intentioned advice: • “Leave your feelings at the door when you come to work …” • “Never let them see you sweat …” • “Keep your emotional distance from team members, or they will see you as weak and won't respect you.” While some of these axioms are more colorful than others, the message remained the same: “Stay tucked comfortably inside the ivory tower, or else people will begin to think you’re one of them.” But let’s face it: those types of philosophies reflected archaic leadership methods and practices that didn’t work well then and are even less effective today. That’s why today’s most effective leaders and executives incorporate an approach known as “professional intimacy” into their management repertoire. It’s a term you may have heard, but for the uninitiated, let’s define exactly what it is — and what it isn’t. Professional intimacy (also called corporate intimacy) describes a concept under the larger umbrella of Authentic Leadership.1 According to a recent article on Indeed.com,2 “Authentic leadership is one leadership style that emphasizes transparency, genuineness and honesty. Authentic leaders build genuine relationships with team members by inspiring trust and fostering a positive work environment.” Professional intimacy, then, is an essential ingredient in the Authentic Leadership recipe that helps make it work the way it was intended. In a professional context, intimacy should be viewed as close familiarity. It is NOT a romantic or erotic relationship that originates in the workplace. Nor does it refer to the common misunderstanding that genuine closeness automatically develops when individuals share secrets. At its core, professional intimacy describes the process of letting the people with whom you work closely get to know “the real you” and vice versa. What’s more, it is meant to be used with no regard for a person’s title, position or responsibilities; the “real you” should be on display for everyone to see. Bountiful Benefits What is the outcome of all this newfound closeness and openness? According to an article in Psychology Today,3 professional intimacy holds the key to myriad corporate gains, including: • Enhanced individual and team performance • More effective senior leadership • Reduced stress • Increased happiness and fulfillment • Improved communication by removing defensiveness • Enhanced creativity • A reduction in counterproductive “groupthink” Given this laundry list of potential benefits, it’s no wonder more companies are viewing professional intimacy with much greater applicability. I’ve been personally involved with many companies Professional Intimacy LEAVE IMPERSONAL LEADERSHIP BEHIND By Karen Brown, CEO, Exponential Results Colorado Banker 10
aiming to make the transformation to a leadership structure that incorporated this approach. One example comes to mind that illustrates how professional intimacy can highlight the behavioral stumbling blocks that plague many people in the corporate environment — and how it can be instrumental in addressing and solving them. I met a senior leader who was quite proficient at their job but closed off from sharing openly about themselves with team members. This came to light in team-building work, ongoing senior leadership team (SLT) meetings and, subsequently, in meetings with tangential team members. Other members of the team also experienced a behavioral pulling back — or shutting down — from this leader. This was especially evident during emotionally intense work, such as assignments where significant financial stakes were in play. As a coach working with several SLT members, I noticed it and wondered why the leader operated this way, almost as if they were reveling in their introversion. I implored the CEO and other SLT members to ask this leader questions that would encourage opening up after demonstrating it was safe to do so. It was necessary to look below the surface of the behavior (pulling back) to gain an understanding of why they learned to operate this way, to uproot it and, ultimately, change it. The key that made this possible was leaning into this particular leader with the safe inquiry: “I noticed a pulling back when XYZ happened. Where does that originate?” Turns out, this leader’s mother was on food stamps and welfare when he was younger. He experienced shame and embarrassment from it and subconsciously vowed to do anything and everything to avert it in the future. Due to being poor, he was also bullied in middle school, so he viewed being authentically open about himself as a way that others could exploit what he considered to be a weakness and hurt him. This insight proved extremely valuable in helping this leader break down psychological walls and begin to feel more comfortable opening up to professional colleagues. Explaining the Unexplainable While getting to know your team members can make your business better, more profitable and more efficient, there are other, less tangible benefits that are still highly desirable. When you know what is important to team members and what motivates them on a personal level, it’s possible to illuminate previously unexplainable behaviors and either align with them or effect a transformation. It’s similar to knowing their core values but on an expanded basis. Two questions that often prove to be highly revealing are: • “What motivates this leader to come to work here specifically?” • “What are the most important things that create an environment which encourages growth?” While these questions are intended to elicit positive responses, certain questions that root out negative feelings are just as useful, such as: • “What are the things that will cause this leader to shut down, pull back or disengage — or even cause them to start looking to leave the company or pull back from the team?” • “What is the biggest challenge this leader experienced growing up that created how they show up at work?” To understand why these types of questions need to be asked and answered, remember that each team member is like the spoke of a wheel. If one spoke is loose, the wheel will stop rolling/performing well. There will be bumps that slow down collaboration and hinder the feeling of being secure enough to share their creativity because they fear not being accepted for who they really are. Consequently, they assume a “persona” that is all about work; however, the persona isn’t sustainable within a team that is aiming for high-level results or is pioneering new methodologies. When all team members feel safe enough to open up and show their true selves, they subconsciously realize they can count on each other, no matter what work situation the team encounters. They realize that their positions are stable as long as they stay authentically open and are willing to work on improving. Conversely, when no one bothers to look below the surface — enabling the pullback — the leader feels let down and subconsciously interprets this seeming indifference as proof that they are on shaky ground. Thus, a repeating cycle ensues until it’s interrupted. “4 Questions, 4 Minutes” One of the methods we use with senior leadership teams to elicit openness is a lifechanging exercise called “4 questions, 4 minutes.” It’s life-changing because each time we take a team through it, every leader claims it allowed them to learn things Stronger work relationships give birth to more meaningful discussions, more innovative solutions and better business outcomes. 11 Colorado Banker
about their peers they never knew while creating a framework for them to do the same. Here are the questions we ask (and we encourage team members to jump in and ask additional questions as each one shares): 1. Where are you from, and where did you grow up? 2. Where are you in your family’s birth order? 3. What were you good at, or what did you like doing while growing up? 4. What is the most challenging thing you experienced growing up that creates how you show up at work? It is truly amazing how these simple four questions get leaders to open up, revealing who they really are under their professional exterior. On one leadership team, we found instances in which 60% of the leaders were from four-sibling families, and all held the same place in the birth order. Two of them never felt like they were accepted for who they were; they put on a “work persona,” choosing not to let team members see their true selves. Despite the obvious upsides of professional intimacy, certain precautions must be observed. The most obvious is, can professional intimacy go too far? Does it mean knowing the business and career aspirations of your team members, or can it venture into the personal (for example, knowing their kids' names, their favorite sports team, etc.)? Ultimately, it can be both, as it’s important to know the entire person. Can a line be crossed when trying to establish this intimacy? Are there any “guard rails” that leaders should observe? A good rule is to stick to using the doorway of how these leaders show up at and through their work. Along the path of sharing, invite them to reveal familial facts, aspirations, dreams, hopes, fears and beliefs; but don’t feel slighted or discouraged if it appears that the person’s comfort level begins to decrease due to this unfamiliar sharing process. They will continue to open up over time as their subconscious confirms it’s safe to do so. R U Proficient at RQ? The “4 questions, 4 minutes” exercise, while instrumental in nurturing professional intimacy, is one element in a larger concept known as Relationship Intelligence Quotient, or RQ. Quite often, the quality of our relationships at work determines the quality of our work and, ultimately, our success. Stronger work relationships give birth to more meaningful discussions, more innovative solutions and better business outcomes. If you’d like to engage in a FREE inventory of your own Relationship Intelligence Quotient, contact Exponential Results or visit their website at yourexponentialresults.com. This is a proven, cutting-edge system used globally by companies of all sizes. The inventory takes approximately 30 minutes to complete, and you will have immediate access to your results. Karen Brown is the CEO of Exponential Results, a full-service leadership development firm that elevates leadership skill and performance of Director through C-suite. Get in touch with her at karen.brown@yourexponentialresults.com. Resources 1https://online.hbs.edu/blog/post/authenticleadership 2https://www.indeed.com/career-advice/careerdevelopment/authentic-leadership 3https://www.psychologytoday.com/us/blog/ irrelationship/201510/5-benefits-of-corporateintimacy WE MAKE IT EASY LET OUR TEAM HELP YOU SECURE THE DEAL AND LOWER YOUR RISK • UP TO 90% OVERALL FINANCING • UP TO 25 YEAR TERM • FIXED-RATE PREFERREDLENDINGPARTNERS.COM | 303.861.4100 Leveraged financing and refinancing of owner occupied real estate and long-term equipment. Most for-profit small businesses eligible. SBA defines businesses with net profit after tax <$5.0 Million and tangible net worth <$15.0 Million as small. Colorado Banker 12
CONTACT US TODAY! 801.676.9722 sales@thenewslinkgroup.com Your Customers Are Too. Advertising Space Available. QR Code “Over my 16-year tenure with Bankers’ Bank of the West, every minute of our work has been dedicated to bringing solid expertise, services, and products to ensure community banks sustain a competitive edge. We’ve certainly grown strong as partners, looking out for each other—and we look forward to continuing that tradition.” Bankers’ Bank of the West LOAN PARTICIPATIONS|MERCHANT SERVICES|ATM DEBIT|WIRES bbwest.com | 800-873-4722 www.bbwest.com President and CEO Bill Mitchell We Champion Community Banking Member FDIC 13 Colorado Banker
How did you get started in the banking industry? I began my career in banking by entering the management training program at a privately owned Colorado bank two weeks after graduating from the University of Colorado in Boulder. I interviewed for the position during the fall semester of my senior year and accepted the job before I started my final spring semester. This took a lot of pressure off me as I approached graduation. It was the only bank job I applied for; my bank account was opened there when I was a child, so it was the only bank I considered. What makes your bank unique? AMG National Trust Bank is a unique, locally-owned community financial institution. We offer a diversified suite of financial solutions, including wealth management and financial counseling, trust administration, tax preparation, retirement plan services, alternative investments, philanthropic solutions and, of course, private and commercial banking. Our clients love this model because they can walk into our building and have access to all of their advisors under one roof. As a banker, I love the fact that I can retrieve a financial package for a credit request within minutes without the client having to reach out to several 3rd party providers. This allows us to move quickly on behalf of our clients. What is the most important thing you’ve learned from a career in banking? If there’s one thing I’ve learned, it’s that change is truly the only constant. I began my career in banking right after 9/11. A few years later came the Great Recession. Just when we thought the world was starting to get back on track, COVID-19 stopped us all again. The banking industry came to the rescue with PPP loans, but a few years later, bank failures were back in the headlines. Today, we’re facing the continued headwinds of an exponentially rising interest rate environment. However, history has proven that things will get better, and I’m optimistic that the lessons learned in the past will help us with today’s challenges. What do you listen to on your morning commute? SiriusXM radio channel 34 (Lithium). As an adolescent of the 90s, I was naturally a fan of grunge/alternative rock. I started playing the drums when I was 16 years old and still play to this day. Bret Duvall Denver Market President AMG National Trust Bank CBA Centerpoint What is the most rewarding aspect of your job? Face-to-face customer interactions have been highly rewarding to me. Helping people realize their financial goals and dreams continues to be a meaningful part of my job. I enjoy the challenge of thinking of creative and constructive ways to help people; it truly brings me joy. Working with my peers and coworkers has been professionally and personally satisfying as well. I’ve built some wonderful friendships, and I enjoy sharing things I’ve learned with others who are just starting out or who are striving to be even better bankers and financial advisors themselves. What is the most important thing you have learned from a career in banking? The most important thing I’ve learned in my 32-year banking career is that the banking field is always evolving. New challenges and obstacles are a constant. Industry regulations continue to evolve, and banking delivery methods continue to adapt to consumers’ and business owners’ ever-changing needs. I’ve needed to continually push myself to gain new knowledge to continue providing customers with an excellent banking experience. As bankers, as long as we never “settle” in our field, we’ll always be relevant to our communities. What is one of your favorite most recently read books? Crucial Conversations by Kerry Patterson. I wish I’d read it when my children were younger because it has some excellent insights into improving conversations with children, spouses, neighbors, co-workers, customers and pretty much everybody with whom you might interact. The most meaningful section, for me, deals with how to master the stories in your head when you’re feeling emotional about a subject. Who is one of the most influential figures in your life? I have been very blessed to have numerous people in my life who have helped smooth out my many rough edges. But the person who continues to be most impactful to me is my spouse of over 30 years. She continues to inspire and motivate me to be the best version of myself. I would not be the person I am today without the loving, compassionate and caring example of my wife. I will forever be grateful for the support and love she has shown me through thick and thin. Kent Palmer Executive Vice PresidentCommercial Banking Adams Bank & Trust Colorado Banker 14
How did you get started in the banking industry? I can best be described as an “accidental banker.” After graduating from college, I was unsure what direction I wanted to go with my career. I applied for a job at a local community bank to give me a place to work until I figured out what I wanted to do with my life. They hired me as a mortgage loan processor, which seemed crazy to me since I had no experience in lending. I fell in love with the job and the bank, and 23 years later, I’m still here. What is the most rewarding aspect of your job? Getting the opportunity to live and work in the same community is amazing. The people we help at the bank are the same people who teach my children, who I run into at the grocery store and who I consider my friends. The same goes for our employees. I love working with a group of people who are as invested in our community as I am. What is the most important thing you have learned from your career in banking? Be prepared for the unexpected, and never get too comfortable. I never have any idea what situation is going to arise on a given day when I walk into the bank, and there have been things that came up in my career that I never could have anticipated. Learning to pivot directions quickly and be flexible with plans has been imperative to success. Change is good! Who is one of the most influential figures in your life? I have two! My girls, Nola, 13, and Rilynn, 11, have taught me more about life than anyone else. Watching them deal with adversity, navigate the unknown, understand the demands of my career and everything else that goes along with growing up is truly amazing. I call them my North Star — they have given me direction and understanding in life that has provided me with such a different perspective, both personally and professionally. Niki Stotler President | CEO High Country Bank GOING BEYOND THE DESK TO HEAR THE STORIES OF COLORADO BANKERS How did you get started in the banking industry? I moved from Mexico to the United States 12 years ago with a background in Engineering and Technology. I settled in a small town in Colorado’s Western Slope, where job opportunities in my field were limited. But I needed a job, and my neighbors who worked at Alpine Bank encouraged me to apply for an Electronic Banking Support Specialist position. Alpine Bank ended up being a great fit for me! I found opportunities along the way that allowed me to grow and fulfill my aspirations in the banking industry. What is the most rewarding aspect of your job? As Director of Staff Development, helping our most valuable asset (our employees) reach their full potential. Encouraging them to see beyond the glass ceiling and giving them tools to accomplish what they thought they wouldn’t be capable of doing. What are you most proud of in your professional life so far? Being able to adapt to a new culture in a foreign country. Making a dream come true full of opportunities, challenges and rewards. None of this came to fruition until I learned how to believe in myself. I had to learn how to trust the process and find joy through the journey. I had several key people cheering me on along the way, for which I am immensely grateful. When you were a child, what did you want to be when you grew up? I wanted to be a cashier at a clothing store. The idea of using a cash register, handling money and selling goods to customers seemed fascinating to me. I remember arranging my bedroom as a fully functional boutique, using clothes from my wardrobe and selling them to my imaginary customers. What do you geek out about? Inspirational quotes. I am all about self-motivation and development. I love learning from the past, making the best of the present and creating an extraordinary future. Some people find inspirational quotes annoying or overrated. But I believe that, when they speak truth to you, they can do wonders, and as a result, we begin to behave differently. “As a man thinks, so is he.” Susana Salamun SVP – Director of Staff Development Alpine Bank 15 Colorado Banker
With your help, we can help remove one of the roadblocks standing in the way of the nation’s farmers and ranchers. WASHINGTON UPDATE By Rob Nichols, President and CEO, American Bankers Association Advocating for ACRE HOW CONGRESS CAN HELP RURAL AMERICA FFarmers and ranchers today face numerous challenges: from the skyrocketing costs of materials to supply chain disruptions to difficulties purchasing rural land — all while interest rates are rising. As a result, many are relying more on credit than ever before. For those who are young, beginning or socially disadvantaged farmers, these obstacles can seem insurmountable — in fact, 69% of young farmers say that access to capital is a top challenge to beginning a career in farming. Fortunately, there is a simple solution that can help make credit more accessible to these agricultural borrowers: the bipartisan ACRE Act, a bill that ABA is aggressively championing in Congress. Formerly known as ECORA, this bill would amend the IRS code to level the playing field for banks — especially community banks — by allowing lenders to exclude from gross income any interest they receive on loans that are secured by farm real estate or aquaculture facilities. The bill also allows for the exclusion of interest on certain home mortgage loans in rural communities. Removing the taxation of interest will bring down the cost of making these loans, making them more affordable for farmers, ranchers and rural homeowners. In fact, ABA estimates that this important legislation could expand access to affordable agricultural and home loans to more than 4,000 rural communities across the U.S. and deliver approximately $1.4 billion in annual interest expense savings to farmers and ranchers in 2023 — savings that can make a crucial difference to the nation’s producers. This simple, commonsense solution does not require the creation of new government payments or programs — quite the opposite. It provides an avenue for increasing competition and generating growth in rural communities efficiently and organically. It also levels the playing field between all agricultural lenders, which will result in more choices and lower rates for rural borrowers. ABA has been a vocal proponent of this bill, and we were pleased to see such a significant response from lawmakers in this Congress. The ACRE Act Colorado Banker 16
already has 20 bipartisan cosponsors in the House and has been introduced in the Senate by Senators Jerry Moran (R-KS) and Angus King (I-ME). Lawmakers now have an opportunity to help sustain and grow rural America by sending this bill to President Biden’s desk. That’s why ABA is urging bankers and their customers to get in touch with their members of Congress and urge them to pass the bill. Bankers can contact their lawmakers easily through ABA’s grassroots platform, secureamericanopportunity.com. The association has also prepared a toolkit, accessible at aba.com/ACREtoolkit, that provides an issue backgrounder, talking points and key points that bankers can use when explaining to lawmakers why this law is needed. Our nation needs a thriving agricultural sector. With your help, we can help remove one of the roadblocks standing in the way of the nation’s farmers and ranchers. Email Rob at nichols@aba.com 17 Colorado Banker
AA large number of community banks have purchased General Market (GM)/Non-Bank-Qualified tax-exempt municipal securities for their investment portfolio over the past 5-10 years. General Market munis offer an attractive yield/spread over comparable Bank Qualified (BQ) munis, and up until recently, the historically low-cost-of-funds environment for banks mitigated the federal TEFRA penalty imposed on General Market munis. However, the significant increase in interest rates over the past year and a half makes the purchase of General Market munis much less attractive unless banks consider forming an investment subsidiary to hold them. TEFRA Act In the early 1980s, the U.S. Congress enacted the Tax Equity and Fiscal Responsibility Act (TEFRA), which levied a penalty on community banks seeking tax-free income through municipal bonds, limiting the amount of tax-free income earned on these investments. The federal government felt the banking industry was “doubledipping” — earning tax-free income on munis while enjoying a deductible business expense for interest paid on deposits funding these investments. General Market vs. Bank Qualified Municipal Bonds To lessen the blow, Congress allowed a smaller penalty, or discount, to be applied for tax-exempt municipal bonds for a newly created subset of the muni market — BQ munis. BQ munis are for municipal bond issuers that issue no more than $10 million in tax-free bonds in any given calendar year. Congress set this qualification to provide a ready market for the “smallest TEFRA Haircut Calculation is a function of 3 areas: 1. TEFRA haircut (20% for BQ or 100% for GM) 2. Federal tax rate 3. Bank cost of funds BQ TEFRA Haircut Formula: 20% (TEFRA disallowance) * 21% (tax rate) * 2.50% (cost of funds) = 0.11% BQ TEFRA-Impact: (3.50% - 0.11%) / (1 – 21%) = 3.39% / 0.79% = 4.29% TEY BQ Not Subject to TEFRA: 3.50% / (1 – .21%) = 3.50% / 0.79% = 4.43% TEY (+14 bps) GM TEFRA Haircut Formula: 100% (TEFRA disallowance) * 21% (tax rate) * 2.50% (cost of funds) = 0.53% GM TEFRA-Impact: (3.70% - 0.53%) / (1 – 21%) = 3.17% / .79% = 4.01% TEY GM Not Subject to TEFRA: 3.70% / (1 – 21%) = 3.70% / 0.79% = 4.68% TEY (+67 bps) Investment Subsidiaries Offer Solution For Municipal Securities By Larry Wood, Executive Vice President — Financial Institutions Group, The KeyState Companies Colorado Banker 18
issuers” in the muni marketplace, ensuring steady and permanent demand for those smaller towns and municipalities that qualified. When TEFRA was enacted, a Bank Qualified muni issuer bringing $10 million to market was a considerable issue size, and these issuers made up approximately 30% of the entire municipal bond market. Today, the $10 million limit has not increased with inflation, so the Bank Qualified share of the entire tax-exempt muni market has declined to less than 5% of the total municipal bond market. Banks purchasing BQ bonds pay a premium to do so because only a limited number are issued. This premium has created a permanent yield advantage for General Market munis. The yield differential for comparable maturities and credit quality BQ munis vs. GM munis is generally 20-50 basis points. Beyond a significantly better yield, the GM municipal market is superior to the BQ muni market in other aspects. The GM muni market is considerably larger, which creates greater liquidity and provides an opportunity to create a more diversified municipal portfolio since there is a much larger pool of municipalities that issue GM muni bonds. The larger pool also provides a significantly larger population of bonds with higher agency ratings. Also, GMs are not limited to the $10 million annual issuance limit that applies to BQs, giving banks the opportunity to purchase larger block sizes. Without this, most regional banks have avoided building large municipal bond portfolios. Finally, these bigger, more sophisticated municipalities with larger issues provide more complete, transparent and timely financial data to investors and ratings agencies. This additional yield has enticed community banks to purchase GM munis over the past 10 years. During the same time period, banks have experienced a relatively low cost of funds, so banks have taken advantage of the steep municipal bond muni curve with less concern about how the TEFRA penalty could degrade their tax equivalent yield. Now, with the prospects of “higher for longer” interest rates, the penalty can meaningfully reduce a bank’s effective yield on new or existing GM municipal holdings. An Investment Subsidiary Solution In the current interest rate environment, banks are unable and unwilling to sell their GM munis and recognize losses. And as banks’ cost of funds continues to increase, the larger TEFRA penalty will greatly reduce the tax-equivalent yield on a bank’s GM muni portfolio. One solution is for a community bank to form a wholly-owned subsidiary to hold their GM municipals — a General Market Investment Subsidiary (GMI sub). In 2007, the U.S. tax court ruled in PSB Holdings v. Commissioner of Internal Revenue that a bank investment subsidiary is not itself a “bank” and therefore is not subject to the TEFRA haircut for BQ or GM munis. This case resulted in banks with investment subs revisiting GM munis as a potential sector for investment. The court noted that, other than simply avoiding the TEFRA haircut, a bank must have a business purpose or reason for forming an investment sub, e.g., minimizing state taxes. The investment sub allows a bank to consolidate management of the investment portfolio, provide access to highly skilled investment officers (through the service provider it hired to manage its investment subsidiary) and provide greater purchasing power for portfolio services like custody and bond accounting. Decision to Form a GMI Subsidiary Banks have been utilizing investment subsidiaries for decades. In the current market environment, many banks may look to municipal bonds to enhance the yield of their portfolio. Banks with muni portfolios should evaluate forming an investment sub so that they can hold and build a GM muni portfolio. Interested community banks should always consult with their tax advisors and also with professionals experienced with forming and managing investment subs for banks. Larry Wood is Executive Vice President — Financial Institutions Group for the KeyState Companies. He oversees KeyState’s Investment Advisory and Bank Investment Subsidiary group with over $16 billion in assets under management. Founded in 1991, KeyState manages taxadvantaged investment and insurance structures for over 120 financial institutions across the country. For more information, please contact Larry Wood at lwood@key-state.com or visit www.key-state.com. KeyState is not a tax advisor — please consult your bank’s tax advisor before proceeding with any strategy. WE'VE GOT YOU COVERED WWW.CP2LAW.COM DENVER | FORT COLLINS | GREELEY Coan, Payton & Payne, LLC provides a full range of legal services to the banking industry. 19 Colorado Banker
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